Summer’s Money Exchange Scams

Rates can vary by more than 20%, from official quotations to money exchange prices and currency ordered through banks. An American tourist has to pay $143 for €100

Summer’s Money Exchange Scams

Rates can vary by more than 20%, from official quotations to money exchange prices and currency ordered through banks. An American tourist has to pay $143 for €100

MILAN – Summer impacts on the money exchange market, like everything else. Just as petrol inevitably goes up at the heaviest weekends for traffic and hotel rooms cost twice as much as they will in October, the high season is definitely not the best time of the year to be exchanging dollars or sterling for euros.

Proof can be found on the electronic display boards outside money exchanges in railway stations, airports and the centres of the country’s art towns. The boards carry two rates, not one, for each foreign currency. Beside the national flag and the name of the country are a buying price and a selling price. Any asset sold by financial markets, whether it be shares, bonds or physical goods, has a different price depending on whether it is bought or sold. The price at which a financial operator, in our case the money exchange, sells will always be higher than the price at which it buys.

But how big can the difference get? A glance at the display boards tells you it can be very big. For example, one Italian currency exchange was offering these rates yesterday: one US dollar was being bought for €1.43 and sold at €1.26. This means that an incoming American tourist would have to pay $143 for €100 but when exchanging any remaining euros on departure would get only $126 for €100. The difference between the two rates is known as the spread. In this case, it is 17 cents or 14%. It’s the same story with the pound, purchased at £0.94 and sold at £0.79 with a 15 pence spread that represents 20%, or for the Swiss franc, bought at CHF1.34 and sold at CHF1.10 for one euro with a spread of more than 21%. That spread, plus any commission, is the operator’s compensation for the service provided.

Obviously, money exchange rates are different from official quotations. The exchange rates in the papers or on the internet are not the rates applied when we change our money. Yesterday, the European Central Bank reported the euro-dollar rate as hovering around $1.33 with sterling at £0.86 and the Swiss franc at CHF1.23. Yet the spread between buying and selling prices looks hefty. You get the impression that the classic law of the market has kicked in and that with so many people wanting to buy euros, the price has spiked. Sector professionals point out that cash has a cost because of its physical nature. It has to be transported and stored. And transporting cash means providing logistics and security. So how can we avoid price differentials that exceed 20%? Exchanging money at a bank could be one option. The bank’s spread at the counter is lower but still significant. For example, one of Italy’s biggest banks has a spread of around 7%. It buys pounds at £0.89 and sells at £0.83 and purchases US dollars for $1.38 and sells at $1.29.

Nevertheless some, albeit not all, banks today no longer offer money exchange services to tourists. They will only change currency for account holders because it takes too long to record a new customer’s details. Banks that do offer the service do not usually keep a lot of foreign currency and require purchasers to book in advance.

Differences of five, ten or fifteen cents are even more significant in comparison with the spreads on world currency markets, which are of the order of ten-thousandths. Chris Walker, a foreign exchange strategist at Barclays, explains that when currencies are very liquid, as is the case with the euro and the dollar, the spread tends to be very small – just one or two “pips” (0.0001) depending on volume and conditions.

The solution is to use your credit card wherever you can. Currency conversions for credit card transactions are made at the day’s official rate.